Sticker shock continues in March; CPI rises 8.5% over the past year
The consumer price index (CPI) increased by 1.2% in March, in line with consensus expectations. Core inflation, which excludes more volatile food and energy prices, rose by 0.3% for the month.
Over the past year, headline and core CPI rose 8.5% and 6.5%, respectively. The headline figure was noteworthy, marking a new highwater mark for the current cycle while reaching a level last seen in the early 1980s.
As expected, Russia’s invasion of Ukraine had a significant effect on the composition of inflation over the month, pushing a variety of commodities notably higher. Energy prices rose by 11.0% in March, with gasoline up 18.3%. Both are expected to ease in the coming months but for now are sapping consumer spending capacity.
If there’s good news in the March inflation numbers, it’s in the core reading, which eased considerably to 0.3% — the smallest one-month gain since September. That’s a hopeful sign that perhaps broad-based price increases are in fact easing.
Real hourly earnings fell by 0.8% in March, with weekly earnings declining by 1.1%. That erosion in inflation-adjusted income is hitting many households hard, making it impossible to keep pace with rising prices. Over the short term, consumers may be able to tap into savings or credit to maintain their spending, but the longer that inflation runs hot, the greater the sustained headwind to discretionary spending.
The sharp breakdown in the collective consumer mood reflects inflation worries more than anything else. The economy may be slowing, but it’s still growing at a solid clip, and job creation remains strong. It’s the fact that consumers are watching their income gains disappear and then some in their grocery and gas bills that is disheartening.
Broadly speaking, the inflation report tells the story most had expected: that inflation is high and still rising. The lingering question is how much more upside there could be in the inflation rate before it rolls over. Many economists are still pointing to a probability that the 12-month gauge is very close to peaking. Whether that is the case or not is unlikely to alter the near-term path for the Fed.
The recently released minutes from the Federal Reserve’s March meeting confirmed that board participants are prepared to taper the balance sheet more aggressively than in the 2017–2019 tightening period, while leaning into 0.50% rate hikes to make up ground more quickly. The March inflation report lends additional credence to the Fed’s plans. Will the Fed’s current plans be sufficient, or will they need to move even more aggressively? That remains to be seen, although there are some signs that the supply-side challenges to the global economy may be easing at the margins, which would be a welcome development for policymakers. The Fed can certainly cool the demand side of the economy, but an easing in supply-side obstacles could provide another source of disinflation to finally help to put a lid on rampant price increases in the near term.
The bottom line? As expected, inflation continued to run hot over the month of March, reaching a new four-decade high. Having fallen behind the curve, the Federal Reserve now appears prepared to attack inflation with a double-barreled approach of near-term rate hikes and quantitative tightening. With growth already slowing, the path to a soft landing has narrowed.
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